Taiwanese firms are not pulling out of China despite rising labor costs, but are moving from coastal to inland areas as they shift their investment focus from manufacturing to services, DBS Bank said in a report.
The report contradicted the popular belief that Taiwanese companies are relocating to South Asia to cut labor costs or moving home as the government is beckoning.
“We don’t see an exodus of Taiwanese firms from China though production costs have risen significantly in recent years,” DBS economist Ma Tieying (馬鐵英) said in the report.
From 2007 to last year, Taiwan’s foreign direct investment (FDI) in China gained 5.1 percent — although the total value slipped in 2011 and last year from the peak in 2010, Ma said.
The recent decline in Taiwanese FDI occurred mostly in China’s coastal areas — with investment in Guangdong and Jiangsu provinces falling from US$10.1 billion (NT$301.38 billion) in 2010 to US$7 billion last year.
During the same period, FDI reached a record US$5.8 billion in inland provinces, especially in Sichuan Province and the northeastern region of China, Ma said.
More affordable wages accounted for the migration, he said.
By relocating from Guangdong and Jiangsu to Sichuan and Liaoning, firms can lower labor costs by 15 percent, Ma said, adding that in the central part of China, such as Hubei, Hunan, Hebei, Henan and Jiangxi provinces, wages are 20 to 25 percent lower.
Investing in inner provinces also helps Taiwanese firms penetrate deeper into China’s markets, as the central, western and northeastern regions account for more than 60 percent of the population, the economist said.
China’s domestic market is also attractive to Taiwanese firms in the service sector, he said.
Investment in the service sector rose to a record US$5.1 billion last year, with the money mostly going into financial services, wholesale and retail trade, and real estate, DBS statistics showed.
An increasing per capita income and progress in urbanization are changing the lifestyles and spending behavior of Chinese consumers, leading to the upgrade of consumption structure toward services, the Singaporean bank said.
FDI is the only way to capitalize on China’s service demand given the non-tradable nature of services, Ma said.
By contrast, Taiwanese FDI in ASEAN grew by only US$0.2 billion in the past two years, most of which were concentrated on Vietnam, DBS said.
Poor infrastructure, a relatively low degree of policy predictability and large cultural differences remain barriers for Taiwanese firms, the bank said.
Moving back to Taiwan is not feasible for all firms because manufacturers in labor-intensive sectors would face even higher cost pressure, Ma said.
Nonetheless, since November last year, when the government launched a special program to facilitate repatriation, applications for investment have grown to US$5.9 billion as of February, a big jump from US$1.6 billion in the first 10 months of last year.